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American Economic Review: Vol. 103 No. 1 (February 2013)

AER Volume. 103, Issue 1 | Previous ArticleNext Article

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Entropy and the Value of Information for Investors

Article Citation

Cabrales, Antonio, Olivier Gossner, and Roberto Serrano. 2013. "Entropy and the Value of Information for Investors." American Economic Review, 103(1): 360-77.

DOI: 10.1257/aer.103.1.360

Abstract

Consider an investor who fears ruin when facing investments that satisfy no-arbitrage. Before investing he can purchase information about the state of nature as an information structure. Given his prior, information structure α investment dominates information structure β if, whenever he is willing to buy β at some price, he is also willing to buy α at that price. We show that this informativeness ordering is complete and is represented by the decrease in entropy of his beliefs, regardless of his preferences, initial wealth, or investment problem. We also show that no prior-independent informativeness ordering based on similar premises exists. (JEL D14, D81, D83, G11)

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Authors

Cabrales, Antonio (U Carlos III de Madrid)
Gossner, Olivier (Paris School of Economics and London School of Economics and Political Science)
Serrano, Roberto (Brown U)

JEL Classifications

D14: Personal Finance
D81: Criteria for Decision-Making under Risk and Uncertainty
D83: Search; Learning; Information and Knowledge; Communication; Belief
G11: Portfolio Choice; Investment Decisions